Lending history has old roots coming from ancient Europe. Though each of us has a different visualization of the phenomenon of lending, it spins around the well-known issue of taking the amount in exchange for interest. The lender provides the funds to the borrower and agrees to receive the lump sum of the amount plus the interest.
Ahead we will present the evolution of the lending system in a nutshell, beginning with the introduction of its first steps in ancient Greece and Rome.
The First Steps of the Lending System: Ancient Temples
The origins of the loan system may be traced back to ancient Greece, Babylon, and Rome, where temples were the early banks. Wealthy Romans considered the temples secure places to keep the money since they were always full of dedicated workers and priests and were safeguarded by guards. Temples did not pay interest on deposits, but they did charge interest on loans and participated in currency exchange and validation. As the temples were the financial centers of the cities, it’s no wonder why they were plundered during wars.
The Introduction of the “Zemindar” System in Rome
The next volume of upgrades in the history of loans was the separation of banking from temples. The ancient Romans established banks in new separate buildings as accomplished architects and builders.
In the next phase of the evolution of lending, the “zamindar” system appeared. It was an exchange of goods against the funds. The borrowers were obliged to provide exact goods (due to the prior arrangement) in exchange for the money. The principles of the “zamindar” system revealed a new form of fund lending in exchange for work. For example, farmers borrowed money from the lenders and agreed to accomplish the same jobs against the financial obligations.
Royal Borrowing from the History of Lending
The various kings that controlled Europe understood the importance of financial institutions. Because banks could only exist by the grace of the governing sovereign, and occasionally through express charters and contracts, royal authorities began to borrow loans to make up for poor times at the royal treasury, usually on the king's terms. Because of the ease with which kings could get funds, they engaged in lavish extravagances, costly battles, and arms competitions with other kingdoms, which frequently ended in crushing debt.
Adam Smith’s Banking System
The new era of lending had started nearly since the 1800s when the “saving funds society” came to the reality. However, later the property secured loans gained the advantage over the “exchange form” of lending. The history of finance takes an entirely new stage with Adam Smith’s (the father of modern banking theory) theories.
In the 18th century, it was predicted that an automated economy, known as "the invisible hand," would allow markets to find equilibrium. So, when Adam Smith introduced the "invisible hand" hypothesis in 1776, banking was already well-established. However, a close examination of Smith's work reveals his comprehensive grasp of the origins of modern financial institutions. The economic system presented by Smith possesses all of the features of a modern banking system. Moreover, his investigation indicated a close relationship with the current banking crisis.
History of Loans: J.P. Morgan and Commercial Banks
The history of loans is also closely connected to the name of J.P. Morgan, who rose to the top of the commercial banks. It had direct access to London, the world's financial capital at the time, and significant political weight in the United States. Morgan and Co. established U.S. Steel, AT&T, and International Harvester, as well as duopolies and near-monopolies in the railroad and shipping sectors, via the innovative use of trusts and contempt for the Sherman Antitrust Act.
Although there were well-established commercial banks around the turn of the century, it was difficult for the typical American to secure loans. These banks did not advertise, and they rarely gave loans to "ordinary" individuals. Racism was also prevalent in the history of finance, and while bankers were required to collaborate on significant issues, their clients were divided along class lines.
Digitalization of Lending System
Since the beginning of the 21st century, digitization has affected banking and shifted them into the modern world of service providers. An enormous amount of financial software has been developed to minimize the lending system's manual procedures. The existence of new platforms gave a chance to make the lending process much more accessible through online and mobile banking. Nowadays, most financial institutions allow their users to do online financial activities such as opening accounts, lending funds, or even making repayments.
In accordance with the survey of the BBVA, the percentage of customer loan applications filled out through exactly mobile phones increased by 45%. Why does the study focus on the loans applied through cell phones? The main reason is hidden under convenience to apply. The borrower does not need to be at home or use the computer to apply for loans. Furthermore, Fintech (the financial technology) recently boosted the peer-to-peer lenders’ websites. The peer-to-peer lending web pages suggest direct online loans without any physical presence requirements. There are many webiste that act only as connecting platforms between trustworthy direct lenders and borrowers.
Payday Loans as a Beginning of the Future System
Nowadays, technology development brought forth the notion of one-click small loans that are very popular in the US due to their uncomplicated and automated mechanism. Applying for these small loans is as simple as buying something online using just your cell phone. Payday loans are sort of short-term obligations that are designed to be paid off within short time limits. You may apply online and get an instant credit decision on the same day. Never mind if you have a bad credit score or history, you may still be eligible to apply for next-day loans online and find a direct lender. As the Internet is froth with online lending platforms, the borrowers should understand that these platforms are not lending you money; they just help borrowers connect with the lenders. Payday loan services are available in the majority of states. However, these borrowing means tend to have higher interest rates than traditional loans. If you wonder “who invented interest rates,” we want to mention that the roots of interests trace back to the early second millennium BC. The notion of interest was invented because silver used in payment for cattle or grain could not increase on its own.
Loan history has evolved from the ancient world's temples to phone applications. Still, its essential business processes and motives for existence have not changed: primarily safety and security via trust and accountability. How consumers interact with their bank or with many service providers offering bank-like services, including the internet and mobile phones, is rapidly changing. It is disputed whether banks will be as omnipresent as they once were, but what is unarguable is the services that banks have provided, which are critical for both individuals and companies.
What is also straightforward and unlikely to change is that there will also be scammers wherever there is money (digital or cash). As a result, banks must distinguish between legitimate and illegal activities.
As a final analysis, we understand that the wave of technology development will lead us to the automated world, where everything may come to be available in the online space.